102 CLimare ConFuston’ productive when a church adopts the policy preferences of envi- ronmentalists—it can even be contrary to the church's stated ‘mission, The church has not been told the truth about the nega~ tive, unintended consequences that will result from the global ‘warming policies that they now endorse. ‘While relatively iti aid in the Bible that dectly addresses four use of natural resources there is abundant advice on the {importance of caring for other people. And that care docs indeed depend, one way or another, upon our use of natural resources ‘ut in order to make responsible policy decisions and avoid doing ‘more harm than goad to both the environment and humanity. {s imperative that we not repeat the mistakes ofthe past. Ihave come tothe conclusion that these mistakes, like most policy mis- takes, are usually the result of widespread misconceptions that exist in one particular domain: basic economics, Chapter 6: It's Economics, Stupid Desrize rue eunticrzeo ranting by some climate scientists, science by isell has nothing to say concerning what should be done about global warming Science is policy-neutral and values- ‘eutral. While the Union of Concerned Scientists is interested in what society should do about a wide variety of issues ike global warming, their views should carry no more weight than, say, the Union of Concemed Movie Stas’ policy position on global warming. [Nevertheless we scientists ae citizens, too. We have our own copinions—this book, for example—about what should be done to reduce any numberof perceived threats to humanity and the have noticed that a person's opinions on policy matters are almost always a result of their understanding of economics. We ‘cannot meaningfully discuss what should be done about global warming, or any other environmental policy issue, without a ood working knowledge of basic economics. Unfortunately, while economic concepts are inseparable from the discussion of our response to the threat of global warming, ‘economists explanations of hows economies works are typically 105,104 Cumare ConFuston 0 jargon-laden and obscure that my eyes glaze over just think= ing about them. The good news is thal the economic principles that are the most important to understand are relatively easy 10 ‘grasp. Yet despite their simplicity, as well as the overwhelming historical evidence for their truth, many people sil refuse to believe them. But you look ikea reasonably intelligent person, so let's forge ahead, ‘The famous definition given tothe term “economics” by the hineteenth-century economist Lionel Robbins is “the study of the tse of scarce resources which have allemative uses" Another way lof expressing this i thatthe practice of economics involves the exchange of our time and talents in ways that maximize how ‘much stuff weal collectively get rom the limited amount of tll that can be produced. Putting it even more simply, economics involves people doing useful things foreach other, hopefully in the mos efficient manner possible. Why should our policy response to global warming come down to economies? A progressive, environmentally conscious person might say, “Money; money, money’... all people are wor- ried about i the bottom lie, how much they can earn The global fevironment i too important to reduce it to a matter of dollars and cents But what that person does not appreciate is that, except for social capital commodities such as love and friendship, evhing ‘comes clown to money: Not money prs, but the relative value to humans of one thing versus another, wich we quantify in units ‘of money. Giving different things different monetary values is simply an easy way'to quantify how important these things are to society Humans cannot live without altering ther environment to sit thee ced, and smart economic decisions make sure that the needed natural resources are allocated (shared) in the most cefiient ways. Unless we understand basic economic principles, we cannot ‘come to a responsible view of what should be done about global ‘warming, or any other environmental issue that costs money 10 fix. So let's review some ofthe cconomne truths that I hold to be Is Economies Stupid 105, self-evident, While none of these concepls are nev, they have bbeen clarified and sharpened for me by two great economists: ‘Thomas Sowell and Walter Williams, Here [present them in way that has made the mast sense to me over the years Any’ Toss fof accuracy resulting from my own interpretations and examples are my faut alone. Twene 15 No sucH TING As A FREE LOCH. Unlike some truism, this one is always true. Think radio is free? You pay for it through higher prices fr goods and serves adver~ tised on the radio, Frce health care? Someone has to pay fori For many Europeans, ther“free health care is pa for by charg- {ng $6 fora 1 gallon of gas. Do you believe that the salesman really is throwing something in for free when you buy something cls? Try telling him you wil take just the free item, thank you very much T assume that people want to keep eating Clothes to wear? Some place to live? Transportation? Communication? Medicine when they get sik? X-boxes and iPods? A clean environment? All of these things (hich I il interchangeably call “wealth an “tui, require work and resources to produce ‘And what about those who cannot provide these things through their own efforts—the poor, widowed. orphaned, cheon= ically il, and the elderly? Taking care of them eequiees even more ‘wealth And what about when a natual disaster strikes, ane many people are unable to contribute to the economy anymore, but Sill require goods al services just to survive? Still more wealth Misconceptions about money can get in the way of our under- standing of wealth. Money has no inherent value by ise Its simply a mutually agreeable and ready form of exchange of indi- vidual units of wealth between people. Money allows the car manufacturer to sel his car tothe baker without having to accept 21,000 loaves of bread in exchange. And the baker can sell a single laf of bread to the ear manufacturer without having to accept a car ten signal ul in eeturn,106 CLimate Conrusion How about the government printing more money? That sounds like an easy way t0 create more wealth! Unfortunately, printing more money creates no new wealth The printing and spending ‘of more money by the government has the same effect a raising taxes since in effec, it lowers the value ofall ofthe money that, Is already in circulation, There is more money chasing the same number of goous and serves, which then causes pries to rise. ‘The practice of printing more money is a major source of Inflation. Entire governments have collapsed for not grasping the fact that money isnot wealth. In Germany after World War money was printed as fast as possible to pay for debts that resulted from the war. The inflation rate was astronomical. Money that employees made in the morning was almost worthless by the ‘end of the day There were not enough printing presses to print ‘money fst enough. It each the point where people had trouble just carrying the amounts of money needed to pay for daily The only way to create wealth i for people to do useful things for each other. There is no free hunch, because it took time, resources, and human effort to make that lunch. ‘One opinion thats often voiced about global warming policy fs that, given the global warming threat, we must do something. ‘But “doing something” inevitably means devoting some portion ‘of our wealth to attack that problem, which means tha that por- tion of our wealth is no longer available to address other prob- lems. Thus, the cost of doing something to fix one problem needs to be weighed against the use of those funds to adress other issues. I's one of those “cost versus benefit” things you might have heard about. Pt another way, there are not unlimited financal resources to fix every problem that faces mankind and the environment. “This a specific example of the more general economic tuth that people have an unlimited source of wants, but only a limited supply of goods and services. Weal want more than we ean pro- vide for each other This is what economists lke to cal scary? John Stossel, a consumer advocate reporter on CBSS 6o Min Its Eeonomties Stupid 107 ts, yars ago had a remarkable revelation. He finally understood some basic economic tuts. Inthe frst ofa series of specials, he ‘posed the question “Are We Scaring Ourselves to Death? The te was meant tobe literal. not figurative. His primary thesis was that, when ie allow ourselves to be overly concerned about some~ thing that ia lesser threat, our spending of some portion of our "wealth to solve that problem means that other, mote pressing problems wil likely get less money When the media decides what ies you should be informed about, they are unknowingly assuming a huge responsibility: The media shaping of public opinion on issues that the media decides {are important can result in public policy changes that can liter= ally kill people Economists have been teying to tellus this for ‘years, but we didnt understand them because they keep using words like “scarcity” and “marginal costs” But shouldnt we be doing something about global warming, ‘san insurance poliey against future loss? Sure... iFit makes ‘economic sense. For instance, we buy homeowners insurance to protect us against loss that we cannot afford to replace. It makes sense to spend, say, $1,000 a year on homeowners! insurance that gives us 100 percent ofthe replacement value fa $200,000 house is destroyed by fire But inthe case of global war insurance, most policies being promoted are like paying $0,000 ‘a year on insurance that does even begin o cover the replace- sent cos ‘Many people think that there f a constant amount of wealth, and all that matters is what you can do to grb a piece ofthe pie. In these folks’ minds, there ate the “haves” and "have-nots and life {is an unfair struggle for everyone to “et theirs” People who have this view are int class warfare; they re hateful toward, and jeal- ‘us of the rich, (ly definition, the “rich” are people who make more money than you do) Wit were tre thatthe total amount of wealth i constant, how108 Cuimare Conruston could we explain the higher standard of living that we have ere= ated over the years? Many years ago, only the wealthy among us ‘ould afford an automobile, a refrigerator or even a microwave ‘oven, Now, even most of those who live in poverty have these modern conveniences ‘Aconstant amount of wealth necessarily implies that it really doesn't matter what we do when we work, since it obviously ‘doesnt change the total amount of wealth anyway. IF this were true, se could all have jobs a citch-diggers or diteh-fillers. Half ‘of us could dig holes inthe ground ll daylong, ane the other half ‘could il them up again. We could have everyone working dil- ‘gently, with zero unemployment. Bul no wealth would be created Where would we get food? Clean water? Housing? Clothes? Med ical eae? 10'S? Computers? Pods? Automobiles, airplanes, and all other forms of transportation? Who would invent new and more efficient ways of providing these goods and services? Not only ‘would no new wealth be created, but existing wealth would be destroyed, since it would be gradually used up oF worn out ‘makes all the clference inthe world what people do when they work, not just thal they work Whether you pay your neigh- bor $2 or $2,000 to dig hole in your front yar, you stl only hhave a ole to show fori is what we do for our money, and how efficiently we doit that matters. The more efficent we are at providing the goods and services that other people need, the ‘more wealth everyone will have. ‘There ia true story about someone i the audience of a1 talk show remarking “the taxpayers shouldnt have to pay for this service the government should?” From an economic pont of vies the taxpayers are the government. For the most part, government ‘does not generate any’ new wealth, except tothe extent that it pro- Vides some services that everyone values (eg, national defense, which we pay’ for with our tax dollars. The government collects money from us through taxes, and Is Eamomics, Supid 109 redistribute it to others based upon whatever lected representatives have decided are important. But the value ofthat “government money” comes from commerce carried out ‘between people, not from some sor of governmental blesing it has been given Ina healthy economy: iti the people who determine what and ‘how much of different things they want, not some government bureaucrat. It isnot just a theory, but a historically demonstrated fact that tthe poople—not politcians—swho ae the most efliient at deciding what goods and services they need and want, and ‘what the prices of those things should be. Every time a nation’s leaders try to control prices or supply, the wil of the people is thwarted. This is why political and economic freedom is $0 ‘essential tothe prosperity ofa country, and why many countries, especially in Africa, are so poor Even though the government does not, in general, create ‘wealth, it can certainly enable or discourage the generation of ‘wealth by is citizens Uhrough its ability to pass laws and collet taxes. Any activity tha taxed more by the government will be avoided more by consumers and investors, Conversely, activites that are taxed less will be encouraged. Pally as a result of capital sains tax cuts, the economy in 2005 and 2006 was so healthy that hundreds of bili of dollars more in tax revenue was cok lected by the government than sas expected. That is alot of ‘money in anyone's book Thus, more tax revenue can usually be collected by encourag- ing economic growth than by ralsing tax rates. Tax revenues area “percent ofthe ation” and anything tht stimulates more action leads to more tax revenue. When politicians try to collet more tax revenue by increasing tax rates, they usually end up hurting the wealth creation process and, aa result collec les tax revenue Fart MARKETS PROVIDE THE MOST PROSPERITY FOR A SOCIETY. {As Adam Smith observed in his 1776 book, An Inquiry into the Nature and Causes ofthe Welk of Nations, the selfishness of thoseno Cuumate Conrusion ‘who seek a profit in a fee market economy simultaneously causes {an invisible han” to reach out to help others Afterall. the person ‘who grows rch only docs so through the willing participation of ‘other people: Others either give some oftheir money to get val= able goods or services thatthe rich person and his business offers ‘or they work forthe rich person to help produce those goods and services. Everyone benefits when these wansfer are done on ‘mutually agreeable basis, a is done in a free market economy. ‘na free matket economy like that in the United Sates, itis the consumers (you and me) who make economic decisions. If some thing costs more than we think i worth to us, then we will spend our money on something ese that has greater value tous. (On the selling side, fhe seller is filing to sell enough of an item that is being passed over by consumers, he wil be forced to lower the price to make the item more attractive compared to other items. If profit cannot be made by the seller because the item, ‘through inefficiencies, cost too much to produce, then someone ‘ese wil figure outa better ess expensive way to manufacture and listribute the item, Free market economies ensure that a maxi- mum amount of stuffs available a the lovest posible price Decades of misery persisted in the former Soviet Union because the government made supply decisions forthe people. The huge inefficiencies that resulted were caused by the lack ofthe contin uous feedback between producers and consumers that exists ina feee market economy. Soviet economists were fully aware ofthe problem, but their government wasn't very tolerant of ertism ts economic pol ‘Our high standard of living depends upon allowing prices to fluctuate with supply and demand. The alternative is for govern- ‘ment to artificially fx both supply and prices, but doing so only ‘makes the market less efficient at generating wealth Even in America we have dabbled in controlling prices, and always with bad resus Price contols sound like they would help to keep things cheap, but in the end they crete shortages and subvert the overall wealth-builMing nature of ree markets. Prices rising and flling area sign thatthe system is working, Ia con Ms Feonomies, Stupid 111 tras, price controls benefit the few who can get there ist, while the rest of us don't get any. When there are shortages in energy; the fee market system offers the best solution to the problem. If gasoline prices rise sharply because hurricanes destroy oil platforms and driling rigs {nthe Gulf of Mexico, or because global demand for energy was areater than production, some people will naturally conserve _more to avoid paying the higher price for gas For instance, in 2005 virtually all of our Gul of Mexico petro- leum production capacity was shut dawn by hurricane sikes, ‘causing gas prices to rive sharply. But within afew months, the average price of a arte of ol stared falling agai. Thats because people were conserving in the lace of higher prices atthe gas pump. They stopped taking that extra five-mile rip tothe grocery ‘tore just to buy the Q-Tips they forgot the las ime they went shopping In contrast, the deste of California's politicians to fix energy prices at some “fair level resulted in blackouts during the sum- mer of 2000, Electricity shortages were made muich more severe because rising prices were not allowed to force the consumer to reduce consumption, California utilities lost huge sums of money because they had to pay other slates high prices to get extra elec~ tricity during periods of high demand, but they were no allowed to pass the price increases on to the consumer Inthe end, Cali- fornians had to pay for the higher prices anyway, because the ‘government had to bailout the utilities. Despite the central ole that profits playin enabling the pros- periy ofa fce market economy, there seems to be widespread resentment ofthe rich, Does Bll Gates have more wealth than he needs"? Maybe. But the promise of greater wealth is why people Work so hard to find more efficient, and therefore lower cos ways of providing goods and services. History has shown that i the profit motivation is removed, people tend to get lazy. Then everyone suffers, If a few people get obscenely rich in the process, what do f care? The software products that Microsoft creates have made myna Cumare Conrusion job much easier and more productive. Those benefils, which are Enjoyed by hundreds of millions of people around the word, are ‘much more valuable to me than say. my tiny share of Bill Gates fortune should he decide to give i all back tothe consumers. Since Bill Gates cannot personally design, manufacture, and lstribute all ofthese software products, he employs thousands ‘of people who help him accomplish the task, who then share inthe newly created wealth. Those Microsoft employees then ‘exchange their money with all kinds of stores and merchants ‘who, in tur, have ther own employees “The rich become rich only because consumers voluntarily give them money in exchange for the valuable goods and services they offer to society. The mere existence of the rich should remind tus thatthe system slill works, and that millions of people are benefiting from the innovative ideas ofa creative fe ‘One ofthe biggest complaints about the fee matket system is that it is “unfair? There are wide disparities between rich and poor Buti it unfie that people be rewarded fr their innovative ‘work tha leads to 0 much prosperity? For developing more eff- ‘ent ways to meet the needs of thee fellow man? For causing the «eatin of rillons of jobs thereby enabling many others to share in the nevsly created wealth? For creating the extra wealth that i nceded to support (through charity) those wo cannot support themselves? Still, people continue to hold onto the mistaken view that by imposing “Iairness” on the exchange of goods and services wwe can let everyone share equally in our wealth, While it does ‘accomplish the equality pat, it has the unintended consequence fof making everyone equally miserable. There are no longer any Incentives to maximize our creation of wealth and so the econ omy suffers. Despite these economic realities, the mainstream media con- tinues to champion anyone who advocates such approaches t0 “foimess? World leaders like Cuba's Fidel Castro get glowing praise from people who themselves would not live in the eco Ws Economic, Stupid 13, nomic conditions that have been imposed upon that country ‘There's a reason why Cubans continue to drown trying to escape tothe United States, IF you want to sce why so many’ journalists are so clueless on economic ses, just Took athe course requ rents fora degree at any journalism school The poor in a fee market system are typically richer than the poor anywhere else. Because ofthe great amount of wealth that 2 free market economy generates, there is plenty leftover for charitable contributions to keep people afloat who cannot, for fone reason or another, provide for themselves ‘The personal charity of people after Hurricane Katina led (0 the housing of hundreds of thousands of people who had lost their homes The rest of the country, through axes, will help to re~ build the hurrcane-devastated portions of Louisiana, Mississippi. and Alabama, The only reason the United States can absorb such ‘catastrophe with so litle damage to its economy isthe economic ‘wealth and infrastructure that hasbeen built up over the yeas. And that wealth is only possible through free markets, allowing ‘the peopl to decide what something is worth to them, rather than allowing government bureaucrats to decide. Ina socialist country there are few rewards forexta effort for new ideas, of for improved efficiencies. Everyone gets the same, equal, and comparatively small share of the total amount of ‘meager wealth that has been generated by’ the populace at the direction ofthe government. A county lke Sweden has only been able to make socialism work for so long because they are not entirely socialist, They have kept fce market principles in place, ‘which has helped to generate sufficient wealth to support the ‘outrageous level of taxation they now have. And recently, in 2006, the increasing desire to generate jobs over wellre handouts has Jed to the ousting ofthe Social Democrat government in Sweden. Finally, the reat wealth generated by the United States free market economy has not just helped the United States. While many nations of the world seem to resent the wealth of the United States, the technological nnovations and increases inng Cumare Conrusion ficiency we have spurred have benefited most of humanity. ‘Other countries have reaped! many of the benefits of Americas inventions and manufacturing efficiencies This is one reason why se should not feel guilty that the United States happens to have the largest per capita carbon di- ‘oxide emissions of any country in the world. In a very teal sense, wwe help feed the word, and we provide avast variety of goods and services that have raised the living standards of the rest of humanity WEAtraien 15 HEALTHIER, SAFER, AND CLEANER. Some Americans experience guilty feelings over our wealth as @ nation, or over the fac that most folks don't have as much as them, Many environmentalsts despise the Wests modem way of life. Others feel that money has brought them more trouble than itis worth, "believe that this collective angst isthe result of many people simply having t00 much extra time on their hands—time which Is only available because of the economic efficiencies we ave created. There is reason why only the wealthy nations of the ‘world worry about the environment: we are the only ones with enough leisuretime and wealth to afford that luxury. Any guilt felt by the wealthy i needlessly self-imposed. Ia rich persons wealth was created through the provision of goods and services that other people value, then you can bet that many ‘more people have collectively benefited than the single, guil- ridden rich person, ‘And shat would the alternative be for people who think that ‘wealth s bad? How would those same people ike to deal with the angst of having half oftheir children not live to see ther teenage years because of rampant disease, dirty water, por nutrition {and food-borne illnesses from a lack of refrigeration? Until about hundred years ago, this was the case for most of humanity. Is sill he case for about one billion people today (Or what about the angst of back-breaking labor just to make Is Eamomics, Supid 115 sure your family has sufficient food, clothing, and shelter every day? It hast been that long ago that our level of wealth (ay as measured by the Gross Domestic Product) began to skyrocket ‘with the onset ofthe industrial revolution. Technological progress has given us new tools new conveniences, new mecines longer lives, and children who actually reach adulthood. Satelites and weather radars help to warn us of approaching hurricanes and tornadoes, saving many lives. In contrast, tropical cyclones in poverty-stricken Bangladesh as recently asthe late twentieth ‘century routinely killed tens of thousands of people ‘Do we really want to go back tothe “good ol days"? There are sll people living today who lived through those days IFyou talkto them, you wil find thatthe good old days werent so good afterall. These people recount how miserable daylife was: dry sly ull fines, and dangerous. The widespread use of horses for transportation caused a continual stench, and many’ people were injured and killed by them. The only reason everyone looked so fresh and happy on the 1 series le House on the Prarie was because those actors and actresses had just taken hot showers in thei air-conditioned trailers after enjoying a catered lunch and were looking forward to thei nex big paycheck. Bjorn Lomborg, in his excellent book The Septic Enver to, reviews in great detail from the data made available in the LUNs own publications, how much better off both humanity and the environment are than they were in decades past Most diseases ‘that use to kill people before they reached adulthood have either ‘been eradicated or now have cures, The production of wealth has led tothe widespread availability of electricity, clean water sani- tation, and refrigeration to prevent food-borne diseases. People who nov yearn for the “good old days" do so fom a position of wealth, health, comfort, and safety. Even though fossil fuels have been indispensable to the advancement of the human ‘onion, some flks are scemingly now eager to dispose of what ‘energize that progtess. They ae like spoiled children, biting the invisible hand that feels them, Rather than celebrating all that i16 Cumare Conrusion 00d, they focus on what i wrong, asf it were possible to achieve perfection, to build a utopia that, unfortunately can only exist in People’ imaginations. Yet some still persist in the belie that such a utopia can be built, where wealth and equality of outcomes can coexist They ‘cannot put modern life in the historical context that gives i meaning andl demonstrates ils superiority over the other alterna tives. They fee that things cout be so much bette, without real izing that we are now ata historic pinnacle of progress, health happiness, and safety: They go through thie lives wringing their hands about the inequities of lfe without realizing that most people, through their own decisions, ave chosen their resent ‘rcumstances ‘They do not realize it but most of them would not want t0 live in a world where everyone is forced to be equal From Economics ro Env! ‘Those who advocate the most impractical solutions to global ‘warming seem to not understand how a free-market economy \works-—even though they participate in one. Tm sure most of them have pure motives, but to rephrase a famous saying, the road to ‘environmental destruction is paved with good intentions. It is imperative that we understand basic economic truths when considering policy approaches to fight global warming, oF any other environmental problem, Other than social capital tems like love and friendship, everything else that has value can be sven a price. Des a forest of trees have more value as pulpiwood and lumber, oF as a place for folks to just enjoy nature? That decision comes down to how much people are willing to pay for fone use versus another. Let's say a person, weil all him Jeremiah Johnson, owns forty acres of pristine wildemess, and that is literally ll he owns, Jere~ :miah has to figure out what he will do to get enough food, eloth- ing, and shelter to lve. He might start by trying to do everything hhimsel He might fashion some sort of clothes out of grasses. He Is Eaonomics, Spid 117 ‘might eat fruit and berries that he gathers i the forest, and plant some sort of craps. Jeremiah could stat building himself og cabin for shelter He would just have to hope, forthe time being that he did not develop an illness or have a bad accident that would require medical attention. ‘Then, one day someone visits Jeremiah and offers him a trade. If Jeremiah wil give the visitor ten of his forty acres, he will receive in exchange food, clothing, and a house tht wil be but for him on bis remaining thity acres. For somebody in that situ= ation, it would be difficult to pass up such an offer. f you have ‘ever been primitive camping, you know what I mean, Jeremiah has thus given a monetary value to is land, Mone- tary value is simply an expression of how valuable something is to people compared to other things 1 lke most others, believe that the United States should set aside wildemess and parks, and keep them fre fom development. But that is because some kinds of| land are especialy valuable tothe publi It is pat of our collective national wealth. The decision to preserve that land is, ultimately, And itis is monetary value that ends up actually protecting privately owned land. In order to maximize the resources that the ‘over can harvest from his land, the landowner is naturally i= ‘entvized to sustain its value. The land wil be of no value to any ‘one itis destroyed, In order to maximize andl sustain his profits, the landowner must care fr the land ina responsible manner Is “Bre Ou" rn ENEMY? [As Ihave mentioned previously, ifcost was no concern and we had easy altematives for fossil fuels, then switching fo those ater~ natives would be a no-brainer But this is no the case. There are, 4s yet, no practical large-scale alternatives fo fossil fuels. Sill, there seems to be a widespread perception that energy ‘companies are somehow conspiring to keep lower cost and envi- ronmentally friendly energy alternatives from the masses IFonly ‘we would just switch t0 solar and wind power, our global118 Cumare ConFusion "warming problems would be over these folks reason. The energy ‘companies are tying to poison the environment, just to spite ‘environmentalist! Mne-heal! igarchomping vil company excave#: Hey, we havent heard ‘much lately from that environmental group: What's their sname?... oh, yeah, “Earth First, Humans Last gar homing ol company exetve #2: You know, you're right. How about we cause an oil spill from a pipeline some~ ‘where? That get ‘em riled up! ‘Do we really think that energy companies enjoy being hounded by environmentalists and the public If the price of gs goes up, they are accuse of price gouging It goes dove, they are accused ‘of making it too easy to pollute because of cheap gas oF of giving in to political pressure from the White House. As I said earlier, people's understanding of basic economics also affects their political views as wel Claims of price gouging ignore the fact that, due to real uc tutions (and forecast future fluctuations in global supply and ‘demand of petroleum, the price ofa gallon of gasoline at the [pump can fluctuate by as much as 50 percent ina single year for purely market-based reasons. Sure, when the rice goes up, the cil companies can reap massive profits Any industry which pro- vides goods that everyone needs will make lots of money when reduced supply (or even the threat of reduced supply) causes prices to rise Alera, as mentioned earlier, the hope for large Profits is what makes a fre market economy so elicient at rai ing the standard of living for everyone. But the petroleum industry has down years, too. They need funds to repair i rigs, platforms, and refineries after a Category 4 hurricane rolls through the Gulf of Mexico and comes ashore. ‘Would those who advocate a public redistribution of ol indust profits caring time of high pres be wiling to bail out those same companies out when disaster strikes? I dont think so. Is Economics Stupid 119 Also, we should also keep in mind that those cigar-chomping ‘executives dort own the oll companies Public investors do. And for the most pari i those investors who experience these gains nd losses experienced by the industry, not the employees ofthe ‘company, Ima free market economy like outs, the cost of alternative fuels is automatically taken into account, and determines to what extent they will be used as an energy source compared to other ‘energy sources like coal and petroleum, A petroleum company ‘employee once told me; if thei company can find an economical source of energy other than fossil fuel, they will promote it They are in the business of making money by supplying energy 10 ‘consumers, and it does’ matter to them wha the source ofthat energy is If wind energy is indeed less expensive than coal-fired power plans in some portion of the country, then its use will gradual ‘row. If solar power is economically competitive, ts use will also {7oW. But sometimes the government subsidizes uneconomical allerative technologies Ina free market economy, such artificial support for non-competitive technologies does not spur long term investment in those technologies, Investors know that as soon as the artificial supports go aay; any profit potential dis- ‘appears. You can tll how much potential a future energy tech= nology has just by how much private money is invested in its development Fortunately, the fee market economy takes care ofthese issues ‘automatically: If some future energy technology i indeed prom= Ising then investors will support it and speed its development land deployment. The govemment doesn't need to do anything, for this to happen, except to stay out ofthe way. ‘Tur Economics or PorwuTion 1 am continually perplexed by environmentalist attitudes toward factories and big business. The greatest aumber of products, with the least amount of wasted resources, energy, and pollution,120 Cumare Conruston’ results from centralizing the making (mass production) of those products i large manufacturing facilities Despite these efficiencies, many people complain, st it awful all ofthe pollution that factory is producing!” But, generally ‘peaking tht factory is producing much less pollution and fewer wasted resources than if every family or every city was respon sible for making those same products fo themselves, All of the leflovers from the production process just happen to be concen trated in one place, giving us a false picture ofthe net elect of ‘mass production on the environment Certainly we need to keep this concentrated. centrally pro- duced pollation from causing undue harm tothe local environ ‘ment oF to human health, but the total amount of that pollution has already been minimized to a large extent through the ‘economies of scale. Further reductions in pollution beyond some reasonable level are an economic decision. I such further reduc> tions are mandated by the government it costs some portion of our ‘wealth to accomplish those reductions How much more are we willing to pay for goods andl services to achieve ever-increasing levels of cleanliness? ‘When the EPA mandates the reduction of some types of pollu- tion to laser and lower levels, they’ scem to be unconcerned! about what the cost to society wil be.1 was astounded when, at a recent sir pollution control conference. an EPA official actualy told the ‘udience that “we cant stop pushing” fora cleaner and cleaner fenvironment. This is dangerous position to take, since there ‘comes a point where the beneis of “leaner” become too meager, andthe costs too high. The result is that some of the limited ‘wealth avilable to attack al of society's problems is no longer available to adress some other problem of greater importance ‘As aresull, government egulators working forthe EPA gener~ ally dont have to wory about the costs imposed upon society of reducing polation by ever-inceasing amounts. First they will ‘mandate a 90 percent reduction in some pollutant. Then 99 per cent. Then 99.9 percent. It never stops, because that’s their jb: to keep reducing pollution. Ms Economics, Stupid 124 But no matter how har we try itis physically impossible to liminate polation. Even if it was possible, no one would want tw pay the enormous cost of accomplishing it Take your home as an example. You do not allow filth to build up to the point of ‘being a health hazard. But, unless you happen to be obsessive- ‘compulsive, nether do you spend inordinate amounts of time and energy making sure every surface is germ-free. Just as it ‘costs something lo hire a janitor or housekeeper, reducing pollu- tion also costs something. And the cleaner we try to make things, the more i costs have demonstrated the cost versus benefit relationship for pollution control efforts inthe accompanying graph. (Scientists love graphs) As environmentaists push fora cleaner and cleaner environment, the costs skyrocket. Since society has unlimited ‘wants, but only limited financial resources, these costs must be balanced against the costs of addressing other problems facing society, As the graph demonstrates, the cost of a totally clean ‘environment can be unacceptably high. our es tom So Modes Misia ta Tele Patan stinky ‘Goan Osetia12 Cuumare Conrusion, When the EPA demands an industey to “clean up’ do you really think they are going to absorb all ofthe cost of doing 40? [As a general rule, competition in the free market has already ‘minimized theie profit margin, shih historically averages around to percent. The aiizens who own stock inthe company are the tones who share in those profits. Additonal costs for pollution control in industry wil simply be passed on, frst to consumes, and then to shareholder in the form of lower profits ‘As a result, when the public demands that some industry clean up its act, they are implicitly agreeing to pay the cost for that cleanup. ‘All too often, industrial polltion becomes a political football that environmentaists and politicians use to pander to public ‘emotions Take the example of mercury pollution from coal-fired powerplants. This source of pollution has remained unregulated since it started in the late 1808. Thee i no empirical evidence ‘of negative health consequences of mercury pollution from these sources Japanese cancer rates are much lower than those in the United States, eventhough the Japanese have much higher mer= cury concentrations in ther bodies from their greater consump- tion of fish Dentists have been handling mercury for years with ‘no demonstrated i-ealth effets Nevertheless, since mercury i perceived to be public health hazard, the Bush administration proposed a cap and trade regu latory mechanism to reduce this source of mercury pollation by 29 percent by 2010, ramping up to 79 percent by 2018. The cost to the electricity industry (hich means the cost fo you and me) ‘was estimated to be about $2 billion But then, despite that fact, that there had been no mercury pollution controls up until that point, environmentalist suddenly demanded thatthe polation be reduced by a much greater amount, and on a much faster schedule. It was estimated that this would have cost over $500 billion to accomplish. Some critics even suggested that President Bush's “weak” plan was evidence of some stealth conspiracy to tur the nation’s children. ‘Well, have decided that even the environmentalist’ plan is Is Feonomics, Spi 125, ‘ot stringent enough. The electricity industry clearly needs 10 stop all mercury emissions within one month. These so-called “environmentalist obviously dont think our children’s health is Important enough to eliminate this dangerous pollutant right now. They must be out to hurt our kids, since their proposed emissions reductions do not eliminate the threat, and take so Jong to implement [think you see my point. I is vitally important that envieon- rental regulations be fashioned to maximize benefits and mini ‘mize costs. This also means thatthe public should not be fooed by political rhetoric which claims some politician “wants to pol- Jute the environment, oF is “against environmental regulations? Every decision we make in our daily lives balances costs versus ‘benefits, andl the same balance needs to be applied to demands by some for an increasingly clean environment. In summary the policy response to global warming, just ike any other environmental challenge, always involves economic ‘This chapter is meant to provide a better bass for you to judge for yourself whether proposed solutions to global warming (or any other envionmental ill make sense oF not. We cannot sim= ply mandate reductions in earbon dioxide emissions without ‘also determining what negative consequences will likely result from such a policy. Inthe coming years, there will be increasing pressure to “do something” about global warming, AS we shall see, the risks of most curently proposed pollution reduction policies far out- ‘weigh the benefits. So, when politicians start claiming to be “doing something” you need to ask two questions: “How much will t cost us" and, “How much will it help? ‘Since the proponents of dangerous and overly restrictive poli cies typically have politcal motivations, let’ take a look at some ofthe players in the global warming policy game. We will see that none of them can claim to be unbiased defenders of the moral high ground,